A FRAMEWORK for MARKETING MANAGEMENT Chapter 4 Creating Customer Value, Satisfaction, and Loyalty Kotler Keller Cunningham 1

© Copyright 2008 Pearson Education Canada Chapter Questions How can companies deliver customer value, satisfaction, and loyalty? What is the lifetime value of a customer? How can companies cultivate strong customer relationships? What is database marketing, and why is it important? © Copyright 2008 Pearson Education Canada

Profile: Canadian Marketing Excellence CANADIAN TIRE In 1922, Canadian Tire started out as a single garage Faces extensive competition from Wal-Mart and Home Depot It has, however, been able to stand firm, remaining the leader in the housewares and hardware categories Unique product mix: automotive, housewares, sports and leisure Canadian Tire money – loyalty program 75% of stores are less than 10 years old Employee e-learning program to improve customer service Offers value to customers © Copyright 2008 Pearson Education Canada 3

Determining Customer Value and Satisfaction Customer perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and costs of an offering and the perceived alternatives © Copyright 2008 Pearson Education Canada

Figure 4.1 Determinants of Customer-Delivered Value © Copyright 2008 Pearson Education Canada

Loyalty Loyalty is a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behaviour © Copyright 2008 Pearson Education Canada

Satisfaction Satisfaction is a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived performance in relation to his or her expectations © Copyright 2008 Pearson Education Canada

Raising Customer Expectations © Copyright 2008 Pearson Education Canada

Product and Service Quality Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Forms of Quality Conformance quality Performance quality © Copyright 2008 Pearson Education Canada

Total Quality Management TQM is an organization-wide approach to continuously improving the quality of all the organization’s processes, products, and services © Copyright 2008 Pearson Education Canada

Maximizing Customer Lifetime Value profitability Customer equity Lifetime value © Copyright 2008 Pearson Education Canada

Figure 4.2 Customer-Product Profitability Analysis © Copyright 2008 Pearson Education Canada

Estimating Lifetime Value Annual customer revenue: $500 Average number of loyal years: 20 Company profit margin: 10% Customer lifetime value: $1,000 © Copyright 2008 Pearson Education Canada

Customer Equity “The ongoing process of identifying and creating new value with individual customers and then sharing the benefits from this over a lifetime association.” Ian Gordon (Canadian Marketing Consultant) © Copyright 2008 Pearson Education Canada

Drivers of Customer Equity Value equity Brand equity Relationship equity © Copyright 2008 Pearson Education Canada

Framework for CRM Identify prospects and customers Differentiate customers by needs and value to company Interact to improve knowledge Customize for each customer © Copyright 2008 Pearson Education Canada

Improving the Value of Company’s Customer Base Reduce the rate of defection Increase longevity Enhance customer growth potential Terminate low-profit customers Focus more effort on high-profit customers © Copyright 2008 Pearson Education Canada

Figure 4.3 The Customer-Development Process Suspects Prospects Disqualified Repeat customers Clients Members First-time customers Partners Ex-customers © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Building Loyalty Partnership Proactive Accountable Reactive Basic © Copyright 2008 Pearson Education Canada

Figure 4.4 Levels of Relationship Marketing © Copyright 2008 Pearson Education Canada

Reducing Customer Defection Define and measure retention rate Distinguish causes of customer attrition Estimate profit loss associated with loss of customers Assess cost to reduce defection rate Gather customer feedback © Copyright 2008 Pearson Education Canada

Forming Strong Customer Bonds Add financial benefits Add social benefits Add structural ties © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada Database Key Concepts Customer database Database marketing Mailing list Business database Data warehouse Data mining © Copyright 2008 Pearson Education Canada

Data Warehousing: SHOPPERS DRUG MART Shoppers Drug Mart Corporation is one of Canada’s largest retailers of health care products/ services Over 974 stores Makes extensive use of data warehousing software Analysis of customer and market trends to support its loyalty program - the “Optimum” card Its competitive advantage is “HealthWatch”, a database that maintains patients’ medical profiles and generates alerts for possible allergies or drug interactions when a prescription is filled The company generated sales exceeding $7 billion (2005) © Copyright 2008 Pearson Education Canada

Figure 4.5 Increasing Customer Share Requirements © Copyright 2008 Pearson Education Canada

© Copyright 2008 Pearson Education Canada For Discussion How does the concept of customer lifetime value differ for different types of businesses? Real estate agents Grocery stores Hotels Furniture © Copyright 2008 Pearson Education Canada